An unrecorded expense adjusting entry has two lines: debit the relevant expense account and credit a matching payable account for the same dollar amount. That single entry recognizes a cost your business has already incurred but hasn’t yet paid. It raises expenses on the income statement, adds a liability to the balance sheet, and never touches cash, because no money has moved.
When This Entry Applies
An unrecorded expense, also called an accrued expense, is any cost your business has used or benefited from but hasn’t yet paid or logged. Under accrual accounting, you recognize expenses when they’re incurred, not when the check clears. The adjusting entry closes that timing gap at the end of a period.
A few situations produce accruals almost every period:
- Wages for days employees worked between the last payday and the closing date.
- Interest that has accumulated on a loan since the last payment.
- Utilities and services you’ve consumed before the vendor’s invoice arrives.
- Employer payroll taxes on accrued wages, including the employer’s share of Social Security (6.2%), Medicare (1.45%), and federal unemployment tax.
Every accrued expense has the same shape: your business owes someone for something already received. Skip the entry and you overstate profit while understating debt.
Calculate the Amount First
Before writing anything down, you need a defensible figure. The method depends on what you’re accruing.
Wages
Count the hours or days worked between the last payroll date and the closing date, then multiply by pay rates. If your period ends on a Wednesday but your pay cycle runs Friday to Friday, you’re accruing Monday through Wednesday. Then calculate the employer’s share of payroll taxes on those same wages. Social Security at 6.2% and Medicare at 1.45% apply to most wage amounts, and forgetting them is one of the most common accrual mistakes.
Interest
Use simple interest: principal × annual rate × (days elapsed ÷ days in year). Some lenders use a 360-day year, others 365. Check the loan agreement. A $100,000 note at 8% annual interest with 45 days since the last payment, on a 360-day convention, produces $100,000 × 0.08 × (45/360) = $1,000 of accrued interest.
Services and Utilities
With no invoice in hand, estimate from contract terms, meter readings, or prior-period averages. A company paying $15,000 monthly rent that closes its books on the 20th accrues 20 days of the 30-day month: $15,000 × (20/30) = $10,000.
Write the Journal Entry
The entry has two lines and the debit equals the credit.
The debit goes to the specific expense account on your income statement: Wages Expense, Interest Expense, Utilities Expense, whichever matches the cost. Debiting an expense increases its balance, which reduces net income for the period, which is the point.
The credit goes to the corresponding liability account on your balance sheet: Wages Payable, Interest Payable, or Accrued Expenses Payable. Crediting a liability increases its balance and formally records what the business owes.
Using the interest example:
- Debit: Interest Expense — $1,000
- Credit: Interest Payable — $1,000
No cash appears. That’s the whole idea. Cash enters only when you pay the bill in the following period.
Wage accruals usually take two entries rather than one: debit Wages Expense and credit Wages Payable for the gross wages, then debit Payroll Tax Expense and credit Payroll Taxes Payable for the employer’s tax share. Combining them into a single line understates the payroll tax liability.
Clear the Entry When You Pay
Once the payment actually happens, the liability has to come off the balance sheet. There are two ways to handle it.
Without a Reversing Entry
If the payment matches the accrual exactly, debit the payable and credit cash. If the payment covers a longer span than what you accrued, the entry has three lines: a debit to the payable to zero it out, a debit to the expense account for the new period’s share, and a credit to cash for the total paid.
Continuing the interest example, suppose you accrued $1,000 at period end and the total interest payment due is $1,200:
- Debit: Interest Payable — $1,000 (clears the old liability)
- Debit: Interest Expense — $200 (recognizes the new period’s share)
- Credit: Cash — $1,200 (records the payment)
Only $200 of expense hits the new period, which is correct.
With a Reversing Entry
A reversing entry is an optional shortcut booked on the first day of the new period. You flip the original adjustment: debit the payable and credit the expense account for the amount you accrued. That zeros the liability and leaves a temporary credit balance in the expense account.
When the invoice arrives, the bookkeeper records the full $1,200 as a plain debit to Interest Expense and credit to Cash. The $1,000 credit sitting in the expense account absorbs the old period’s share automatically, and $200 of net expense lands in the current period.
Reversing entries help most in businesses with heavy recurring accruals, like weekly payroll, because staff can process incoming invoices the normal way without checking whether part of each bill was already accrued. For a one-off accrual, the extra step tends to create more confusion than it prevents.
Catch the Accruals You’d Otherwise Miss
The hardest part of this is not the mechanics. It’s noticing what should be accrued in the first place. A cost nobody flags at period end simply never gets recorded.
Reviewing post-closing invoices is the single most effective check. Pull every invoice that arrives in the first few weeks of the new period and ask when the underlying service or delivery actually occurred. If the work was done before the closing date, it should have been accrued.
A standing accrual checklist handles the predictable items. Rent, loan interest, and payroll come around every period, and a written list with contract amounts, payment schedules, and proration formulas keeps them from depending on someone’s memory.
A quick period-over-period comparison catches the rest. If you accrued $40,000 in wages last quarter and $8,000 this quarter with the same headcount, something was missed.
What Skipping It Costs
A missed accrued expense distorts the financial statements four ways at once: expenses are understated, net income is overstated, liabilities are understated, and owner’s equity is overstated. The consequences aren’t just cosmetic. Inflated income can drive up estimated tax payments, mislead investors, and breach loan covenants tied to debt-to-equity ratios.
When accruals are missed consistently, earnings look artificially volatile: one quarter reports too much profit, the next absorbs the prior period’s unrecognized costs, and the pattern erodes confidence in the numbers.
A Note on the Tax Side
Booking an accrued expense and deducting it on your tax return are not the same event. To deduct an accrued expense, the IRS requires that all events fixing your obligation to pay have occurred, that you can calculate the amount with reasonable accuracy, and that economic performance has taken place. For services provided to you, economic performance happens as the work is done; for property you use, it happens as you use it.1Office of the Law Revision Counsel. 26 U.S. Code 461 – General Rule for Taxable Year of Deduction
A recurring-item exception lets you deduct in the earlier year if the all-events test is met by year end and economic performance occurs within 8½ months after the close of that tax year, provided the item recurs regularly and treating it that way better reflects income.1Office of the Law Revision Counsel. 26 U.S. Code 461 – General Rule for Taxable Year of Deduction
Smaller businesses may not have to worry about these rules on the tax side at all. The IRS allows businesses with average annual gross receipts at or below an inflation-adjusted threshold to use the cash method for tax purposes regardless of how they keep their books.2IRS. Revenue Procedure 2025-323Office of the Law Revision Counsel. 26 USC 448 – Limitation on Use of Cash Method of Accounting